Consumer Price Index—Unchained!


Imagine you’re the director of The Life of Pi and you need a dozen orange whistles to have on location. At $5 apiece, a dozen would cost $60. But if film production were delayed, after a year of 3 percent inflation, those same 12 whistles would run you $61.80. (And you wonder why movie ticket prices are always going up?) Inflation is the economics term for rising prices. Think of a balloon—inflation causes the general cost of living to blow up.

At any given time, some prices are going up while others are coming down. For example, the latest tech gadget costs “early adopters” a lot, but then the price usually drops. The price of a gallon of gas goes up and down daily but tends to rise or fall gradually when averaged over time. So how is inflation measured? The U.S. Bureau of Labor Statistics calculates the rate of inflation through the consumer price index (CPI). The CPI tracks a “market basket” of representative goods: what an average family might purchase in a typical month. Government entitlement programs, including Social Security, factor in the rate of inflation as a yearly cost-of-living adjustment (COLA) so that benefits keep pace with inflation. The income tax code also uses the CPI in setting tax brackets and calculating increases in standard deductions.

Consumers, however, don’t always just pay higher prices. Studies of consumer behavior show, for example, that if movie prices get too high, people tend to go out to the theater less often and watch more movies at home. This is where chained CPI comes in. Chained CPI takes account of the way that consumers substitute lower-priced goods when they can, with the result that their actual cost of living does not go up as much as unchained (regular) CPI predicts.

As lawmakers knock heads over the federal budget, some have proposed using this more accurate measure of inflation. It may help rein in federal spending on entitlements while generating more tax revenue without raising tax rates.

Image credit: © Corbis

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  1. Christian says:

    I love your current events but it would help if for the calendar you would give the options of which day the viewer would like to view for.

  2. makenna says:

    i love this type of stuff i wish yo can up date it to 2k15